Wednesday, April 30, 2008

The Inflation Merry Go Round

It has been pointed out that one of the factors driving up the rate of inflation is actually interest rates themselves. The Reserve Bank had been expecting an inflation figure of 4%, but instead the recently announced number turned out to be 4.2%. Data from the Bureau of Statistics has shown that finance costs account for .2%, which means if you ignore the impact of interest rates the RBA was spot on. Unfortunately, it is likely that the inflation rate will be seen as a reason to increase interest rates even further.

Craig James of the Commonwealth Bank has also pointed out that high interest rates are also stifling the supply of new house construction, which in turn is pushing up rents, another big component in the inflation figure. It all adds up to a very vicious circle. Inflation prompts the RBA to increase interest rates. Interest rates contribute to increased inflation.

The worst of it is that the people who are being hurt most by increasing interest rates are contributing least to the causes of inflation. People who are stretched to the limit on their mortgages are not indulging in an orgy of consumer spending. Far from it. The real causes of inflation are to be found in the high petrol prices which most people consider to be profiteering by the big multinational oil companies, along with the sustained resources boom, which also benefits big multinational companies, as well as the fall out from the United States credit crunch. Once again, that is also an international influence.

So if the consumer is not driving inflation, how is caning the consumer going to fight it? Of course, it’s not. It will only make matters worse for those who can least afford it.